The once-red hot U.S. housing market is cooling off as rising mortgage rates and surging materials costs take a toll.
Housing starts and building permits both fell by more than expected in February, according to a report released Wednesday by the Commerce Department. The bad news comes a day after a survey found homebuilder confidence fell to a seven-month low in March.
Housing, which has been the standout sector in the economy amid the COVID-19 pandemic, accounts for about 15% to 20% of the country’s gross domestic product, according to the National Association of Realtors.
“The peak in housing is in,” wrote David Rosenberg, chief economist and strategist at Toronto-based Rosenberg Research. He argues the level of the data isn’t as important as the direction and momentum, which has been in decline amid a sharp rise in mortgage rates and lumber prices.
The 30-year fixed mortgage rate touched a seven-month high of 3.24% on Tuesday, up more than 30 basis points over the past month. The rate fell to a record low 2.85% in November.
The jump in mortgage rates has occurred at the same time that lumber costs have surged by more than 170%, causing the price of a modest-sized new home to increase by $24,000. Other materials have seen price increases due to supply-chain issues caused by the pandemic.
The cost increases are pricing some new homebuyers out of the market and that is beginning to show up in the data.
“There are some dark clouds on the horizon,” National Association of Home Builders CEO Jerry Howard said.
The National Association of Home Builders/Wells Fargo Housing Market Index, a measure of homebuilder confidence declined 2 points to 82 in March. The index is down from its November high of 90, but up from 72 a year ago.
Additionally, housing starts fell 10.3% in February to a seasonally adjusted annualized rate of 1.421 million, the lowest level since August. Building permits, meanwhile declined 10.8% to 1.682 million, a three-month low. The numbers were below the respective 1.56 million and 1.75 million that analysts surveyed by Refinitiv were anticipating.
While economists and some industry leaders are growing more cautious on housing, others believe the industry will continue to support the U.S. economy.
“The housing market has proven to be resilient in the current environment and we expect it to continue to be a significant driver in the recovery of the overall economy,” said Lennar Corp. Executive Chairman Stuart Miller in the company’s earnings report out Tuesday.